DaimlerChrysler Explores Chrysler Unit's Fate, Slashes 13,000 Jobs

CNBC.com

Wednesday, 14 Feb 2007 | 5:19 PM ETCNBC.com

SHARES

DaimlerChrysler said on Wednesday it would cut 13,000 jobs at its Chrysler operation in North America and indicated it could sell or spin off the money-losing unit, which would unwind a troubled 9-year-old merger between Chrysler and Mercedes.

The world's No. 5 automaker said it would shut two Chrysler plants as part of a strategy to make the business profitable by 2008 as it focuses more on building fuel-efficient cars, a sector of the market dominated by its Japanese rivals. The automaker will also cut North American production capacity by 400,000 units through 2009.

Mercedes

The announcement -- the biggest shake-up of the group since Germany's Daimler-Benz AG and Chrysler Corp joined forces in 1998 -- sent DaimlerChrysler's share price surging to its highest point in more than four years.

"It's hard to say if it's enough ... but the stock is reacting nicely, which is further verification that this is a favorable restructuring move and a much-needed one at Chrysler," said Tim Ghriskey, chief investment officer at Solaris Asset Management.

The plan will trigger a 2007 restructuring charge of up to 1 billion euros ($1.3 billion) but aims to return Chrysler to profit in 2008 and generate a 2.5% return on sales by 2009.

Chrysler has been hit by inventory problems and a growing consumer reluctance to buy trucks and sports utility vehicles, while Mercedes-Benz has been wary of getting too close to its U.S. cousin for fear of diluting its luxury brand.

Chief Executive Dieter Zetsche, who took over the company's top job in 2006, said Chrysler would also explore strategic options with new industrial partners -- a reversal of his position of just three months earlier. "We do not exclude any option in order to find the best solution for both the Chrysler Group and DaimlerChrysler," he told a news conference. "This means all options are on the table."

Zetsche would not elaborate or say if talks with potential partners had begun or whether the automaker had retained an investment adviser.

The Detroit News quoted unnamed company sources as saying DaimlerChrysler had hired J.P. Morgan & Co. to consider options for Chrysler. A spokesman for the bank could not be immediately reached for comment.

News of Chrysler's strategic review sent the group's stock up more than 8% on the New York Stock Exchange to its highest level since June 2002.

It also plunges Chrysler into the maelstrom that has swept up Detroit rivals Ford Motor and General Motors as they cut thousands of jobs and close plants to reflect falling U.S. market share amid an onslaught by Asian rivals.

'Protracted and Messy Negotiation'?

The announcement was a departure from the group's clear statement as recently as October that Chrysler was not for sale.

In a note to clients, analyst Stephen Cheetham at Sanford Bernstein cast doubt on prospects for a quick Chrysler sale, citing the complication of looming talks with the automaker's major union. "Any deal is likely to be the subject of protracted and messy negotiation, especially since the UAW will be keen to ensure that its members' wages and benefits are unaffected. We would therefore not chase the stock here," he wrote.

DaimlerChrysler unveiled its latest restructuring plan for Chrysler almost six years to the day after its first attempt at shoring up profits from across the Atlantic. Zetsche ran Chrysler until taking the top spot in Stuttgart last year.

Although growing ranks of shareholders would like to see Chrysler go, selling it could be easier said than done, analysts cautioned. Michael Raab, analyst at bank Sal. Oppenheim, estimated it would cost 26 billion euros to separate the two businesses.

"It is probably unattractive to any of the major Japanese carmakers who already have a U.S. presence," he said, adding that 20 billion euros in unfunded pension and healthcare liabilities were also a turnoff.

Linking Chrysler up with Renault or Volkswagen could offer the small-car expertise it lacks.

Zetsche's credibility is at stake after a surprise profit warning at Chrysler last year after a shift in consumer tastes exposed its reliance on trucks and SUVs as fuel prices rose. It continued to pump out such vehicles even without dealer orders, inflating inventories that required margin-sapping incentives to deplete.